Officials disagree about bailout supervision

News-Times, The (Danbury, CT), Peter Urban Staff writer

Published 1:00 am, Wednesday, December 3, 2008

WASHINGTON -- Treasury Secretary Hank Paulson is in the doghouse with two top Democratic lawmakers over his department's refusal to keep tabs on how individual banks actually use billions of federal bailout dollars.

The Government Accountability Office issued a report Tuesday that pointed out a number of shortcomings in the TARP program since it began two months ago, including failure to establish a system that would ensure individual banks are using TARP funds to increase lending.

Neel Kashkari, interim assistant secretary of the
Office of Financial Stability
, said the
Treasury Department
agrees there is a need to develop means to determine if financial institutions are complying with the requirements explicitly imposed on them.

But he added he has a "different perspective" on what is needed to evaluate how individual institutions are spending the funds.

Sen. Dodd, D-Conn., said the GAO report reinforced concerns that he and colleagues have voiced about the way the Treasury Department has implemented the TARP program.

"The Treasury Department must execute this program with a much greater degree of accountability, transparency and integrity -- with billions of taxpayer dollars at stake, Americans cannot be taken for granted or left in the dark," Dodd said.

Frank complained Treasury was "perilously close to a breach of faith" with Congress by refusing to enforce lending obligations on individual institutions and by ignoring Congress's clear intent that TARP help reduce foreclosures.

"By rejecting the GAO's recommendation that measurement is needed and substituting a vague promise to 'evaluate the overall success of the program,' Treasury is coming very close to telling the institutions that they will be free to use the funds as they wish," he said.

Frank indicated he would almost certainly call a public hearing to examine the issues raised by the GAO report.

White House Press Secretary
Dana Perino
noted Wednesday that the program is only 60 days old and that Treasury is implementing most of the GAO recommendations.

"They've made significant progress on building the infrastructure to safeguard the taxpayers and make sure that the institutions are doing what they committed to do," she said. "And we will just make sure that we continue to build out that infrastructure, take those recommendations on board, and do what we can."

Congress approved the Emergency Economic Stabilization Act, which authorized the Treasury Department to use up to $700 billion to get the credit markets working.

At the time, Paulson said the money would be used to purchase so-called "toxic assets" that financial institutions held.

Rather than purchase the mortgage-related assets, Treasury decided worsening conditions in the financial market required a more immediate response and implemented its Capital Purchase Program.

So far it has purchased $151.5 billion in senior preferred shares of 52 financial institutions, including $2 billion for Citigroup and $400 million for Webster Financial in Waterbury, Conn.

The parent company of
Webster Bank
said it didn't need the extra capital but decided to apply for it because the Treasury was encouraging healthy banks to take the money to encourage lending.

Webster would be able to lend $400 million more than it would have otherwise. The bank said the money would also allow it to pursue branch expansion and acquisitions.

President-elect
Barack Obama
said Wednesday his transition team will be actively reviewing the TARP program to ensure when he takes office Jan. 20 "any taxpayer money is going to be properly spent."

Obama said the GAO report outlined several areas where "we can be doing better" to ensure taxpayer money is being used effectively to shore up financial markets and not being used to compense CEOs.

Obama also emphasized the need to help homeowners "in a serious way" to avoid foreclosure.

"The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes," he said.

"And if we help Main Street, ultimately we're going to help Wall Street, so that's an area that I'm particularly interested in."